The coming year will not be a simple one for North American banking leaders. Macroeconomic conditions will likely exert downward pressure on earnings at a critical juncture when banks also need to be investing significant capital in cybersecurity, sustainability, regulatory compliance and digital transformation.
At Wipro and Capco, we see our clients facing a mixed outlook: Inflation is decelerating, interest rate increases seem to be tapering off, and job growth remains high even as some sectors—notably growth-oriented tech—experience significant layoffs. The threat of a recession lingers, but is by no means a racing certainty.
We anticipate that 2023 will be a year of strategic tradeoffs. Banking leaders will need to carefully direct available revenue streams toward the transformation initiatives that promise the most long-term value.
Over the past year, our teams have engaged with more than 70 banking and financial services clients, including large banks, payments providers and fintechs, and super-regional banks. During this period, we helped multiple clients launch de novo digital-first banks and observed numerous enterprise-scale digital transformations in the sector focused on payments transformation, core banking transformation, commercial lending transformation and other strategic priorities.
Based on our conversations with those clients and their peers across the industry, we have identified 10 key trends that we will be tracking closely during 2023:
1. Banks will need to be laser-focused on payments data. In March 2023, SWIFT will make ISO 20022 messages for cross-border payments and cash reporting businesses generally available after a short opt-in period. While the new standard promises to bring additional efficiency, transparency, and security to cross-border payments, it will also require rigorous testing on the part of banks, who will need to ensure that their systems can handle significantly larger volumes of data. In addition, the Federal Reserve’s FedNow real-time payment system will launch later this year. FedNow readiness will initially be mostly a concern for large national banks, but that imperative will also trickle down to super-regional and even regional banks.
2. Consumer debt will impact “buy now, pay later” initiatives. Banks have been pursuing consumer BNPL business despite its often-lackluster margins. This year, defaults are likely to rise, along with CFPB oversight. As the nature of the consumer BNPL business matures and shifts, industrial/commercial BNPL solutions are likely to expand, as merchants and other businesses accept new funding methods to enhance their overall appeal by easing the sales process.
3. Fraud management will continue to be a daily battle. Fraud and financial crimes are increasingly intertwined under the banner of cybersecurity; in particular, banks find themselves fending off increasingly sophisticated waves of digital identity-based fraud. As they explore emerging solutions like biometrics, they also need to update and harmonize their risk management and control frameworks. Silver bullets remain elusive, and given the expense of staying ahead of cybercriminals, financial institutions will be best served by developing intelligent, responsive frameworks for where to most effectively invest their cybersecurity spends.
4. Finance leaders will double down on concrete sustainability initiatives. This year, the SEC’s new climate disclosure requirements will put sustainability issues higher up on the agenda of US banks, requiring banks (and other companies) to disclose their greenhouse gas emissions and climate-related risks. More broadly, sustainability will increasingly be viewed as a key C-suite priority as customers, employees and partners exert pressure in the direction of sustainable finance. As Bank of America’s global head of sustainable finance pointed out at recent Davos panel, the vast majority of a bank’s emissions are indirect “scope 3” emissions, meaning that many sustainability initiatives in banking and financial services will need to focus on reducing emissions from financing and investment activities, including by collaborating on “transition to net zero” plans with clients.
5. Consumer lending will fall, but not plummet. Interest rates are rising, and consumer lending delinquencies are likewise on the rise against a looming backdrop of potential recession. A recent forecast from TransUnion predicts that delinquencies will rise to rates not seen since 2010, and banks will issue half of the home mortgages they issued in 2021. To win an outsized share of a more concentrated pool of new consumer lending clients, it will be more important than ever to rapidly upgrade to best-in-class digital lending technologies.
6. Automation will make data and analytics operations more cost-efficient. Despite the many imperatives to do more with data, banks clearly still have a long way to go on their data and analytics journeys. Whether they pursue data-driven advantages through API-enabled open banking partnerships or create in-house solutions, this is a year for banks to focus on making their D&A operations more cost-effective. Gartner estimates that by the end of this year, D&A augmentation/automation will free up around 20% of the time that financial analysts once spent on D&A activities.
7. Contact centers will (finally) get much-needed digital upgrades. At many financial institutions, customer relationships continue to be built around interactions with manual call centers that use decades-old technology. The coming year will be an inflection point for retiring legacy systems once and for all, and undertaking holistic digital transformation of contact centers to both reduce costs and more effectively serve customers.
8. Small and medium business (SMB) clients will clamor for digitization support. SMBs are often overwhelmed by a growing plethora of new digital tools to manage accounting, ERP, payroll, e-commerce, CRM, marketing and point-of-sale (POS) business applications. They desperately want solutions that can automate headache-inducing workloads and synthesize data from across their business, but they often struggle to find the resources and bandwidth even to explore these new technologies. Banks and their financial services and/or fintech collaborators need to consider how the right partnerships can ensure that the right financial and banking technologies can be efficiently understood and deployed by the SMB clients who need them most.
9. Crypto winter will be blockchain spring. In the wake of the FTX meltdown and the post-Terra/Luna realization that even stablecoins are perhaps anything but stable, banks are more convinced than ever that crypto should not be relied upon as either a widely accepted form of currency or a viable growth-oriented investment. They were already skeptical—offering cryptocurrency as an investment option to their wealth management clients but otherwise severely limiting their crypto adventures—and they will further deprioritize crypto initiatives this year. Blockchain, the technology underpinning cryptocurrencies, is a different story. In the coming year, the industry will increasingly be looking toward blockchain and smart contracts to help with processes like identity verification and real-time trade settlement.
10. Metaverse banking strategies will range between caution and boldness. Banks are clearly interested in the metaverse. For now, most of these metaverse efforts have been limited to small customer experience-oriented experiments or very focused internal workforce training and collaboration initiatives. However, some financial institutions are indicating an interest in creating monetizable financial services in the metaverse, and some banks may charge forward in an attempt to gain first-mover advantage when it comes to offering core banking services within metaverse platforms and on metaverse hardware. In a recent study conducted by Wipro, we found that industries across the board are notably enthusiastic about metaverse ROI.
From our vantage point in early 2023, it is unclear whether the coming year will bring a full-blown recession or a relatively brisk recovery. Financial institutions already have a broad sense of which business lines may be most negatively impacted between now and December. Given these potential headwinds, they will need to ensure that their reactive or situational digital transformations (for example, preparing for ISO 20022) are complemented by longer-term investments in areas such as sustainability, contact center transformation, blockchain initiatives, and metaverse experiences.
While banks will need to tread cautiously this year in light of economic uncertainties, they will also find compelling opportunities to undertake bold near-term transformations and future-proof their businesses in ways that will allow them to stride confidently into the second half of this decade.
Ashish Shreni
Practice Head – US Banking Domain and Consulting, Wipro Limited
Ashish leads the Banking Domain and Consulting Practice for the US at Wipro. He is responsible for CXO advisory, CXO relationships, data and analytics, digital strategy, process and technology transformation, risk management, and partnership and alliance strategies, as well as industry representation and industry relationship management.
Daniela Hawkins
Managing Principal – Capco (A Wipro Company)
Daniela is a Managing Principal with Capco. She leads Capco’s payments domain and focuses on consumer cards, P2P, B2B, loyalty, bill pay, real-time payments, and merchant acquiring. She has managed numerous complex transformation and regulatory programs that resulted in changes across business, technology, data and people, and is a regular contributor to American Banker, Payments Journal and Payments Dive.
Contributors
Mahesh G. Raja
Senior Vice President & Sector Head - Banking and Financial Services, Americas, Wipro
Luke Sykora – Content Writer, iDEAS
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